Big Ideas in Macroeconomics book review, Part 5: A Better Defense of Macro

Why write a book defending macroeconomics from the critics? Why go to such a herculean effort to extol something that has so far produced few usable results? It could be simple wagon-circling in the face of an external threat, but I doubt it. The American macroeconomist is an animal with no natural predators. Macroeconomics, as Chris House says, is "the glamor division of econ". Steve Williamson says: "We [macroeconomists] are among the best paid in the profession, we have more than our fair share of Nobels, and there is plenty of work for [us]". He's right. Macroeconomists serve the essential function of teaching America's future white-collar managerial class (undergrad econ majors) how to think about the Fed, the business cycle, etc. They have technical skills that give them lots of outside options for employment. Most of their theories can't easily be refuted by facts (look how long RBC has survived!), so they don't fear the wolf of empirical falsification the way, say, a biologist does. And other economists may grumble or taunt in private, but they have no intention of downsizing their macro areas."Heterodox" critics, and ranty bloggers with highly idiosyncratic motivations (such as myself), are more like annoying birds that fly over and poop on the macroeconomists' habitat; we present no threat to their jobs or their prestige (since their prestige is determined entirely within the community).

So what's the point of writing a long, rambling apologia for modern macro? Maybe my original post was right, and macro methods hold a strange, compelling attraction for the people who use them. Maybe that's all the reason one needs.But if the purpose is to persuade and educate the public (rather than just to vent irritation or give praise), I don't think Athreya's book is going to do the trick. It's too dense for non-economists, and the organization is too scattered to really get any point across. And although I'm sure this was unintentional, it comes off as a bit arrogant - the parts admitting macro's shortcomings are buried and scattered, while dismissals of "useless discussion" and "muddled thinking" among non-economists are sure to offend. Athreya's attempts to educate the mathematically illiterate about macro models, interspersed with condemnations of those who try to understand econ without math, probably just compound the problem. Statements about macro's failures and limitations would help, if they weren't buried so deep and scattered so randomly throughout the book. This is not intentional on Athreya's part; he doesn't mean to come off as condescending, but he almost certainly does so by accident.(Update: No, this is not sarcasm. I really do not think Athreya is an arrogant guy. Even if you don't take my word for it, the parts of the book where he admits the mistakes and limits of modern macro should serve as proof. Academics often talk in a way that comes off as condescending to non-academics; about 80% of the academics I know fall into this trap when communicating with the public. But relatively few are actually arrogant people; they are just used to giving lectures and arguing at seminars.)So I don't expect Big Ideas in Macroeconomics to silence many of the critics, or to educate many people about the field.
Which is a shame, because I think this book could have made a more convincing case in defense of modern macro. It didn't make a bad case, but it didn't make a particularly good one either, and I think there's a better one to be made.

The better case is this: Modern academic macro, for all its flaws, is almost certainly better than any of the alternatives.

In Part 1, I mentioned the possibility that academic macroeconomists don't have much "skin in the game", and might just be playing around making fun spiffy models (and collecting fat paychecks) while the nation's job market goes down the toilet. Well, that's true, but is the problem any worse for the private-sector macroeconomists at Goldman Sachs? No, it's worse, because those people work for firms that have active macro bets! Private-sector macroeconomists have even worse incentive problems than academics, which is probably why politicians don't go to them for advice.

As for "heterodox" economists, the bald fact is that many of them are just political hacks (cue explosion in comment section). Take "Austrian economists", most of whom mix right-wing politics and econ theorizing like...well, similes fail me. But boy do they mix em. "Post-Keynesians" are somewhat less wedded to the political left, but still much more political than the mainstream folks. And MMT people...well, they're just waiting for their Lord Xenu to return to Earth and cleanse the unbelievers, or something.

Now, mainstream macro people have their political biases too. But they aren't as pronounced - they're subtle, hidden under layers of truly Byzantine obfuscation and compensation. Mainstream macro folks are probably a little to the right of other economists, and their deep-buried political biases probably seep out a little bit into their choices of modeling assumptions (for some more than for others). But there is great diversity of political opinion in the mainstream, and generally they try to keep a lid on it. Not so for the folks at the Mises Institute.

So who is left? What other tribe will tell the Fed how to set interest rates, or Congress when to spend money? Mainstream macro has its discontents, but the more time you spend among the people pushing the alternatives, the more you realize how much lesser of an evil the mainstream academics represent. In fact, since I started venturing into the world of the EconoTrolls back in 2012, I've felt a lot more guilty about dissing mainstream macro, and toned it down substantially. I mean, compare the most unfavorable possible reading of Big Ideas in Macroeconomics to some crap like this...there's just absolutely no comparison.

The fact is, mainstream macro is what we're stuck with. If it's going to be reformed, it's going to be reformed from within (possibly along with some pressure from non-macro economists). If macroeconomists are confident enough in their methods to avoid making more than a few tweaks to their methodology in the wake of a huge financial crisis and prolonged recession, then so be it. Big Ideas - even if they aren't Good Ideas - are notoriously hard to dislodge.

10 comments:

Yes, the modern macro is better than heterodox alternatives, but this is not saying much. I think the worst that happened is the string-theory-like ability of the modern theory to avoid any contact with evidence. Any challenge really. It's a nice framework, but it does not constrain data in any meaningful way, and allows constant chasing of nice and uninteresting symmetries.

There's some results, which might be potentially useful, but there is absolutely no systematic discipline in confronting the models with evidence.

The orthodoxy is less biased because... Diversity of political opinions? Ugh. Paul Krugman and the UofC both "know" that carbon emission standards will slow growth. They both "know" that free trade is a panacea, give or take some compensation for the losers. They both "know" that the most interesting events in macro are "exogenous" shocks and therefore beyond their theories.

I don't necessarily fault the macro establishment for failing to produce a model that could predict the financial crisis, because that sounds like a unicorn to me. But if the field can't produce a rough consensus about even the general direction that monetary and fiscal policy ought to take in the wake of the biggest economic meltdown in 80 years, I think the rest of us are entitled to ask what good is it?

I'm sorry but what good is economics at this level if the big ideas that are wrong are left in place? Look at the Stimulus of 2009 and the critics who wrote the protest letter. Did they suffer any consequences for lending their name and credentials to a thoroughly disproven belief. Many of those professors are still teaching the same wrong ideas. They still get to use their professional credentials even though their track record is impressively zero.

This reminds me of the Vaccines/Autism debate with one critical difference, the profession is refusing to take on the people screaming the wrong theories. Eventually the doctor had his credentials taken away because they recognized he was a danger to others. I wish the economics profession would do the same thing.

I have a much narrower definition of main stream macroeconomics. I think that paleo Keynesian macro is not mainstream. In any case there are not so scary people who make arguments which are convincing to people (like me) who think all the inter-temporal optimizing stuff isn't just useless decoration but grossly false with grossly false implications.

People who use IS-LM and new Keynesian models can talk to people who use IS-LM and totally abhor new Keynesian models. Old Keynesian macro has nothing to do with the academic mainstream. It isn't practiced only by scary lunatics.

Larry Summers was always medium heterodox. In the Obama administration he said he received lots of unsolicited written advice. He once said something along the lines of that he had a rule that if he read the word inter-temporal he stopped reading. Brad DeLong is pretty much completely heterodox and he was a fine deputy assistant secretary of the treasury. OJ Blanchard is (as far as I know) extremely orthodox and doing an excellent job at the IMF. I think the intertemporal yada yada doesn't really do much harm as there are plenty of macro economists who don't let it influence their conclusions (even if some feel the need to come up with assumptions so their conclusions are consistent with intertemporal yada yada).

This is not entirely convincing as a defence of a treatment that determines the well-being of millions of people. It amounts to "You say that bleeding the patient, as prescribed by the theory of humours, does not seem to help. True, but the alternatives of cow-dung poultices or whipping don't help either."